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Wednesday, 29 January 2014

First Home Saver Account - Super Return but mind the strings attached

The First Home Saver Account is an initiative by the Australian government which allows people buying their first home (to live in) to get help from the government to save up for a deposit. I remember being turned off by all the strings attached to the plan when I first looked at it a few years ago but if the timing works for you it can trump any other savings plan / investment in the market.

What is the First Home Savers Account?
The first home savers account is basically a savings account that you hold at your bank or credit union (note that most of the major Australian banks do not offer this any more but you can still get it from credit unions) which you use to save for your first home.

The benefit of this account is that:

For every dollar you put into the account (up to $6000) in any financial year the government will co contribute $0.17 (i.e. up to $1020)...that's a 17% risk free rate of return on the $6,000 deposited

The account earns interest like a normal savings account. Members Equity had the highest rate I could find at 3.25% p.a.

The earnings in the account are only taxed at 15%

Trust me when I say there is nothing else out there which gives you a return anything like this. In fact if it wasn't the government giving you the return I'd wonder if it was a scam. But there are strings attached...make sure you don't trip over them.

What are the strings attached to the First Home Savers Account?

There are some pretty big strings attached to the account. Look at the Australian Tax Office website for full details but in order to be eligible

You need to be an Australian citizen or Permanent Resident

You must not have owned a house in Australia as your primary residence (this is how I still qualify - I own an investment property but it was never my residence)

You must not have had a first home saver account before

Then there are the strings attached to being able to withdraw the cash itself:

In at least 4 separate financial years (although not necessarily concurrently) you must deposit at least $1,000 into the account

You must use the cash towards buying a home or building a home

If you do not use the cash for a home or you buy a home before you (or your partner) have completed the minimum 4 year period then this amount gets put into your superannuation account and you cannot touch it until you are 60

You are giving up the flexibility to change your mind and use your cash for other reasons when you open up this account. You cannot change your mind and buy a house earlier if a great deals comes along because you sacrifice everything in that account.

However if you qualify for this account and the timing works for you - it can be the best investment that you ever made

If the timing works for you - you can get an incredible return from this account. If you can time it to the day you can get an IRR in excess of 20% (although the chances of everything slotting together this nicely is extremely unlikely).

I will do another post soon on how to think about maximising the returns from this account. It is easy to do the mats if you want to - make sure you only get the 17% on the new amount you contribute. Keep in mind that contributions do not get added from the government for 3 - 6 months. But also make sure you factor the 3.25% on earnings you get from cash already in the account.

Keep a look out for my next post on maximising your returns from your First Home Saver Account.

Hi - it can only be used for your PPOR (you have to live in it for 12 months I believe) however if you buy an investment property but never live in it then my understanding is that you retain your ability to open a First Home Saver Account